(Bloomberg) — 3M Co.’s stock notched its biggest gain in more than 40 years as investors embraced its new chief executive officer’s plan to put the iconic conglomerate back on track.
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Bill Brown, who took the helm as chief executive officer May 1, used his first earnings report to call out the company’s shortcomings and pinpoint his priorities for the future. At the top of his to-do list: speeding 3M’s pace of new product development to breathe life into a portfolio he acknowledged has grown stale.
“There’s a lot of value that can be created from the raw materials that we have here,” Brown said Friday on the company’s earnings call. “I’m encouraging people to challenge the way we’ve done things in the past every single day.”
It was a message shareholders had been eagerly awaiting. Under former CEO Mike Roman, 3M saw more than $60 billion of market value wiped out as it struggled through stagnant sales, massive legal liabilities and soaring raw material costs. By the market’s close Friday, the shares had gained 23%, the biggest one-day advance on record in Bloomberg data stretching back to 1980.
The gains came after the maker of Post-it notes and industrial adhesives raised the low end of its full-year adjusted profit outlook, which is now $7 to $7.30 a share. That boosted the midpoint of 3M’s forecast by a dime from its previous outlook.
The company also reported adjusted earnings of $1.93 a share for the second quarter. Net sales were $6.26 billion, outpacing Wall Street’s expectations.
New Product Decline
Brown kicked off 3M’s earnings call by acknowledging what many analysts have been saying for years: 3M had lost its way.
The CEO conceded that revenue from new products has steadily declined over the past decade as 3M shifted spending and focus to other needs, such as exiting its “forever chemicals” business and revamping its complex supply chain. And although 3M has identified sectors such as electric cars and semiconductors as key sources of growth, “these efforts aren’t material enough today to offset erosion in our core,” he said.
“The simple fact is our products are aging” in 3M’s core businesses, he said.
Brown also intends to attack waste inside the notoriously complex company, he said in an interview, where a Command adhesive strip passes through five factories and two distribution centers before reaching the customer.
“We’ll take a fresh look at what cost is embedded in that complexity,” Brown said in an interview. The aerospace veteran was named to the top job in March.
Adding to the company’s challenges is that it’s also looking for a new chief financial officer after announcing earlier this month that Monish Patolawala would depart for Archer-Daniels-Midland Co.
3M has more than 25,000 suppliers but more than 80% of its raw materials are sourced from single companies, Brown said. It’s a stunning statistic for a large industrial company, particularly after the pandemic supply-chain crunch forced many manufacturers to build in back-ups to their back-up parts and material providers.
Those descriptions of 3M’s manufacturing operations recall the 1970s rather than “anything we’ve heard of in the modern era,” Melius Research analyst Scott Davis said in a research note.
“The good news, perhaps, is that Bill has the guts to call all of this out. And we all know that you can’t fix a problem if you aren’t willing to admit that it’s a problem,” Davis said.
Lingering Liabilities
Fixing the company’s issues is a different challenge. Even after agreeing to pay more than $10 billion to clean up drinking water supplies, 3M continues to face billions of dollars in potential liabilities over the forever chemicals it plans to discontinue by 2025.
Risks include include potential claims from state attorneys general, environmental regulators in the US and foreign governments and personal injury and property lawsuits.
All told, Barclays analyst Julian Mitchell estimates there are an additional $10 billion of potential PFAS liabilities for 3M that are yet to be resolved. Still, that’s lower than the $16 billion he had estimated previously.
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